The Fed's Secular Acelerationist Stance

Even while the American public remains in quite a sour mood about the American economy, the Federal Reserve has become increasingly bullish.

You can see it in officials’ projections for faster growth and lower unemployment. You can also see it in their expectation that this stronger economy will operate with substantially higher interest rates than they anticipated two years ago.

That last part has lately been treated in the financial press as bad news. That’s not particularly unusual. Higher rates are routinely treated as evidence of trouble ahead for growth and jobs. Read the Fed’s projections together, however, and that’s not the message at all. Officials increasingly expect economic strength to coexist with higher rates while inflation eventually returns to two percent.

The Evolution of 2027's Economy

Let’s focus on the projections for next year. This is useful because these have appeared in every quarterly Summary of Economic Projections (SEP) since September 2024. Back then, the median forecast called for two percent growth, unemployment of 4.2 percent, and a federal funds rate of roughly 2.9 percent. Inflation would be at two percent, and interest rates would have settled at their estimated longer-run level.

The latest projections put growth in 2027 at 2.4 percent, unemployment at 4.1 percent, and the funds rate at 4.1 percent. The underlying median rate projection has increased by 125 basis points. Officials have substantially raised the interest rate they expect to accompany an economy growing faster and sustaining lower unemployment.